Subsidies do not explain China’s competitiveness

Chinese firms have achieved global leadership in industries once assumed to be the preserve of advanced economies: electric vehicles, batteries, industrial robots, solar panels, and AI—to name just a few. The standard explanation for this success is that the Chinese state subsidises production, an argument that has now been given the institutional weight of a major OECD report.

This particular report matters because its conclusions are likely to shape policy debates well beyond the OECD itself. Yet the subsidy story is incomplete and increasingly inadequate. Like every major economy, China does use industrial policy, and its subsidies have mattered. But subsidies are no longer the most convincing explanation for Chinese firms’ growing competitiveness. The OECD is applying an old framework to an economy that has changed.

The report’s first weakness is methodological. The OECD’s estimates rely heavily on the concept of “below-market borrowing,” treating loans priced below China’s Loan Prime Rate as subsidised finance. But the LPR is not a preferential policy rate. It is closer to an average commercial lending rate in China’s banking system.

The arithmetic is revealing. China’s five-year LPR is around 3.5%, while yields on 30-year government bonds are roughly 2.2% and ten-year bonds around 1.7%. A firm borrowing near the LPR is paying far more than the sovereign itself. Treating such lending as subsidised finance risks converting ordinary commercial borrowing into statistical evidence of government support.

The data tell a similarly awkward story. Evidence from more than 5,300 listed Chinese non-financial firms shows that the bulk of bank lending still flows to state-owned enterprises in traditional sectors such as infrastructure, utilities, and construction. Many of China’s most competitive firms, by contrast, rely increasingly on retained earnings, equity financing, and capital markets.

The timing is no less important. Between 2023 and 2025, subsidy intensity among listed new-economy firms declined substantially, and not by accident. While rising local-government debt sharply constrained local authorities’ capacity to provide support, the Chinese government’s push to build a unified national market sought to curb local protectionism and subsidy competition among regions. Thus, China’s emerging industries achieved their strongest gains during a period when subsidy intensity was declining, and when local governments’ budget constraints were hardening.

The same interpretive problem appears in discussions of China’s current-account surplus. Its recent increase is often read as evidence that China has doubled down on export-led growth. But the simpler explanation lies in the domestic economy. After the property downturn, investment weakened more than national saving, and since the current-account balance is the difference between saving and investment, the surplus widened almost mechanically. Much of the adjustment reflects a property cycle, not a deliberate export strategy.

How does one explain China’s competitiveness, then? The answer does not lie in a single policy, but rather in the interaction of industrial organisation, human capital, innovation, and market scale. China now contains multiple stages of industrial development within one national market. Frontier metropolitan areas coexist with vast manufacturing networks, which creates an internal “flying geese” structure—moving some production to lower-cost inland regions—that spans much of the industrial value chain. Products can be designed, tested, manufactured, and commercialised within a single integrated ecosystem before being deployed across a market of more than 1.4 billion people.

Scale alone is not the point. The advantage lies in the interaction between scale, supply chains, competition, and technical capacity. Dense supplier networks shorten feedback loops, large domestic markets accelerate commercialisation, and fierce competition forces firms to innovate and improve quickly. The resulting industrial strength reflects structural capabilities, not subsidies.

Human capital is equally important. China produces roughly 3.6 million STEM graduates and 1.3 million engineers per year—more than any other economy. This high-skill workforce then improves manufacturing processes, absorbs and adapts technologies, solves production bottlenecks, and increasingly supports innovation. China’s greatest industrial asset today is probably not financial capital, but engineering capital.

A subsidy-centered explanation of Chinese competitiveness misses all of this. It focuses on policy instruments while underestimating the industrial ecosystem in which firms operate. It counts government support but gives too little weight to technical talent, market scale, supply-chain depth, and the speed with which Chinese firms move from adoption to innovation.

China still faces serious challenges, of course. It needs higher household consumption, better resource allocation, and a lower external imbalance. But addressing these problems will not weaken Chinese firms. Deeper capital markets, stronger domestic demand, and a more unified national market will more likely than not reinforce many of the capabilities that have underpinned their rise.

The OECD is right to examine China’s industrial policies. But the real question is not how much China subsidises its firms. It is how much those subsidies have translated into China’s industrial success. Subsidies were never the whole story, and as China’s economy has evolved and grown more competitive, they explain far less than the OECD assumes.

Kai Guo is Executive President and Senior Fellow of the CF40 Institute.